Student Loan Dodgers

Citigroup, one of the nation’s largest lenders, has cut back dramatically on its participation in the Federal Family Education Loan program (FFELP). Students who had turned to Citigroup to underwrite the Federally guaranteed student loans in the past will need to find a new FFELP lender. The company’s student lending arm, the Student Loan Corp., fired 146 employers and Citibank, another subsidiary, has announced plans to eliminate nearly 30 positions in its student lending department.

Citigroup characterized the move as a demonstration of its ongoing strategic focus on providing the best possible management for the firm during tight economic conditions. Some of the challenges faced by FFELP lenders include substantial cuts in Federal subsidies to lenders who participate in the program. The loss of the subsidies takes on new meaning in light of the collapse of the secondary loan market, which many lenders used to fund their loan-making programs.

The cuts come at a bad time for students who are scrambling to arrange financing for student loans for the Fall semester. To ensure the long-term availability of funds, the Federal government has dusted off a never-used provision of the Higher Education Act, which called upon individual states to provide a “lender of last resort” for student loans. Most states do have higher education loan agencies, but have never participated as a “last-resort lender.”

Most state agencies are also suffering from the same funding problems that have beset FFELP participants. New Federal legislation enables states to find a guaranteed buyer for their college loans in the form of the US Department of Education, but that backing will not take place until the Fall of 2009. In the mean time, many state lenders have also temporarily ceased lending operations, hoping to ride out the latest financial storm.